Windfall entitlements

Carbon dioxide emission permits are given away for free (grandparented) to electricity companies. This is a transfer of property from we the people to the shareholders of those companies. This has been going on for a couple of years, but no one protested too loudly.

The government has now introduced a new tax on the value of grandparented permits, and the regulator has ruled that this new tax cannot be passed on to electricity consumers. This is a good approximation to the preferred solution of auctioning permits.

Hat tip to Minister Ryan, so.

Of course, there is the law of unintended consequences. First, there was the PSO levy. Now, private companies argue that what once was a windfall profit, now is part of their regular return to capital.

The verdict will be interesting. Will the judge reason from a 2007 perspective, which has that the companies enjoyed a windfall for three years, which the government now ends? Or will the judge adopt the 2010 perspective, which has that the companies have a reasonable expectation for an income stream (based on the current position of the European Commission and the position of the government until only a few months ago) which the government capriciously removed?

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21 replies on “Windfall entitlements”

“…and the regulator has ruled that this new tax cannot be passed on to electricity consumers.”

I’m not sure I understand the logic here? The elec generators will emit as much carbon as is necessary to meet demand. If this tax is to affect emission decisions, then surely it must affect price for end-users of electricity?

Viridian were trying to garner support from other market participants to join in this legal action. Apparently to no avail. They are efffectively now saying 165% of the cost of carbon should be included in their bids. Which hopefully a judge will see it for what it is, nonsenseical. To some companies, particularly those who purchased old clapped out ESB Power Stations as an avenue to get this windfall, will feel this hit hard.

It’s not really a particularly good example of the ‘law of unintened consequences consequences’; it’s more ‘Oh what a tangled web we weave…’.

The windfall was and is a bribe authorised by the EU to secure the consent of major (largely private sector) CO2 emitters to consent to EU-wide quantification and control of their emmissions. It was similar to Nye Bevan stuffing the doctors’ mouths with gold to secure their consent to the establishment of the NHS in Britain. Typical of the EU it involves covert taxation of citizens without their direct knowledge or consent in pursuit of a greater good.

That is not to say that the expected benefits do not outweigh the costs; to my knoweldge no proper assessment has been made. But any policy impact assessment worth its salt would have taken these costs into account. In any event, from 2013, though with the usual plethora of concessions and expections, these windfall gains should disappear.

The situation in Ireland is, of course, more complex. All generators enjoyed these windfall gains from the beginning of the ETS. However, during 2007 (and right up to July 2008 when oil hit $147/bbl.) energy prices were increasing and risked pushing Ireland’s electricity prices well above EU prices. The ESB decided to forgo its windfall gain to exercise some restraint on price increases. However, the ESB does not set prices – at least, not officially; the CER sets prices. So this was dressed up to convey the impression that the CER had raided the ESB and applied the windfall gain to reduce transmission and distribution tariffs which would reduce prices in the interests of all consumers.

However, this was a one-off concession by the ESB and it was damned if it were going to set a precedent (it needed the free cash), so the CER had to indulge in other fun and games. Since the ESB was proving recalcitrant, the Minister decided to tax the windfall gain. But the ESB has had the last laugh. We now have a non-zero, positive PSO levy and the ESB has compelled the CER to increase its estimated cost of capital to generate higher transmission and distribution revenues.

It would have been far better if the Minister, the Department, the CER and the ESB had refrained from messing with the windfall. It should have been accepted as an EU-sanctioned bribe (to which Ireland was a party in the European Council) and they would have been far better employed tackling the underlying deadweight costs that the combination of dysfunctional policy and regulation imposes on final consumers. But they just couldn’t help themselves.

I expect m’learned judge in this case will be compelled to focus on narrow points of law. The judicial branch in Ireland is the only part of the system of governance that comes remotely close to doing what it says on the tin. This case could provide an excellent opportunity to reveal the dysfunction of energy policy and regulation in Ireland and at the EU-level. But this would open up an ‘appalling vista’ and I suspect all the parties involved, apart from this relatively minor niggle, have an interest in maintaining the status quo that continues to gouge consumers.

Still it should be entertaining to witness the dissembling and squirming involved. Citizens are paying way over the top; the least they should expect is some entertainment thrown in.

@MarcusOC
Not necessarily, since emission savings can take place either at the production or consumption end. This forces savings on the production end, presumably since such (or, a high level of them) measures directed at the consumption end are unpopular and regressive.

Fair point. I do reckon that if there’s room for upstream emission reduction (and if the tax is sufficient to make it worthwhile) then the generators can respond. However by allowing them the option to pass it on, the emission reduction should (in theory, assuming price competition, elasticity etc.) take place wherever it is cheapest.

What will happen when these CO2 emmission permits fall to their correct price level level of SFA or a close approximation thereof (as has happened in Chicago recently)? There won’t be any windfall profit then. This will happen sooner or later. There is relatively little chance of Kyoto being renewed or replaced given the opposition expressed by Japan, Russia and others. There will be so much extra evidence of the nature of the emperors new clothes by the time the next big warmist shindig comes around in South Africa next year that it will be extremely difficult for all but the most passionate believers to push for an extension of this type of CO2 cap. Our ruling Eurocrats will then eventually have to face up to the fact that they can’t severely disadvantage European business by persisting with their warmist beliefs that we should all pay a huge carbon indulgence to the green gaia god who seems to have replaced Christianity as the state religion within most EU states.

According to the Coase theorem the rights to pollute the atmosphere did not belong to anyone in particular when they had been assigned a zero value. So is their coming into existence as a traded asset a transfer of property from one party by another party?

@Gregory
According to international law, the atmosphere is the common property of humankind. Part of that has been appropriated by the EU and granted to selected companies.

@MarcusOC
Think Coase. The initial allocation is a transfer of property rights, which does not affect the margins. The (opportunity) cost of the permits does affect the margins, and this is indeed included in the price of electricity. (In fact, it is passed on 100%, confirming Paul Hunt’s view of the sector.)

That said, Viridian now argues that grandparented permits are not a windfall profit, but part of their financing.

Welcome back. It’s been a while since you decided to get on my case. The last time I seem to recall you disappeared over the horizon on your high horse. It would be flattering if you, in David Begg’s parlance, were a ‘person of standing’. Or, perhaps, you represent the interests of ‘persons of standing’. In any event, since this is an open board, you are entitled to hide your identity and affiliation behind a nom-de-plume. But you can, perhaps, understand why I am a tad intrigued.

It is interesting, though, that you have decided to ignore the substance of what, regretably, but, I felt necessarily, was a long comment to home in on the final sentence where I was trying, obviously very badly, to avail of the licence enjoyed by Karl Whelan to apply a rhetorical flourish.

But such is life. As per your request, I have seen the recent Eurostat publications and I have seen the announcement by the Minister/DCENR about Irish and EU prices, but I’m at a loss to reconcile them. Perhaps you would be so kind as to provide links to the relevant data/publications and I might then be able to oblige.

It’s also worth bearing a few factors in mind. Dysfunction in energy policy and regulation is not unique to Ireland. It starts at the top with DG ENER/ERGEG and infects all member-states to some extent or other. It’s just that Ireland exhibits a particularly complex and economically damaging strain. In addition, given the varying extents to which retail competition has taken hold throughout the EU with a plethora of competing price and service offers, I understand that the chaps who collect these prices in Luxembourg are struggling a bit to establish prices that are representative and comparable across member-states. Perhaps, it’s ‘saothar in aisce’; my preference is to focus on the costs in each sector, but prices net of all taxes gives some indication of the consumer-gouging that is going on by the market players.

Furthermore, the Minister has decreed that Irish prices should be re-balanced to reduce the prices considerably for large volume users – but, of course, other smaller volume users must front-up to finance this largesse.

Finally, it appears that the parameters/indices Eurostat uses for PPS comparisons have not been altered since 2007. And there is doubt as to how relevant these comparisons are even if the parameters/indices were updated.

Anyway..getting back to this case, I think the key legal point is that the applicants have a very strong argument that they had a reasonable expectation of continuing to cash in this bribe – though I expect m’learned friends will be more delicate in their phraseology. They had a legitimate entitlement to include it in their cash flows, business plans and in any information provided to shareholders, other providers of finance or to the market in general. Even though the ESRI, previously, recommended, that it should be taxed away, it could be seen as a necessary cost to ensure the establishment of the ETS. My problem with it is that it was a hidden tax and no transparent policy impact assessment was done.

In any event, the case won’t be heard until next April, so, given the can of worms a full hearing has the potential to open up, I wouldn’t be surprised if there were moves behind the scenes to encourage a withdrawal of the application. Though, then again, if we have a new government at that point….

It is very convenient for many to bemoan the fact that banking supervision and financial regulation were woeful, but to assert quite forcefully that these were exceptions and that policy and regulation in every other is for the best of all possible worlds. If only…

From the applicants’ perspective – as I am sure they will argue – these weren’t windfalls. Under ETS there were national allocations of emission allowances. The fact that it transpired that these were in excess of what was required allowing the lucky recepients to enjoy windfalls is neither here nor there so far as they’re concerned. The deal was: ‘Please take these allocations. If you find them a tad over-generous, we’ll turn a blind eye if you make some windfall profits. In return we want you to comply fully with the ETS and its future development.’

This case shows how difficult it is for governments to deal with favoured state-owned and private sector participants in a sector.

@ Paul Hunt
Wow, your first reaction to a simple question is to launch a tirade against me. Strange!

You finished your contribution with “Citizens are paying way over the top; the least they should expect is some entertainment thrown in.” and that was at odds with what I’m seeing in the data coming from Eurostat. In light of that I asked a question so that I could understand what you meant.
As a “citizen” and a householder the only electricity I can buy is inclusive of all taxes and as a business the only electricity I can buy is at the ex-vat price. According to the Eurostat data (freely available on their website) business on consumption levels below 20 MWh per annun and above 2,000 MWh per annun pay less than the EU average (latest figures). Indeed the largest consumers, over 70,000 MWh were paying 29% below the EU average. This represents about 56% of non-domestic electriciy. I do agree with you that small to medium business are paying over the EU average (8% to 11% above). So does you statement that “citizens are paying over the top” only apply to those consuming between 20 MWh and 2,000 MWh per annum? Simple question still awaiting an answer.

Similarily for residential electricity consumers, those consuming between 5,000 kWh and 15,000 kWh per annum (54% of domestic electricty consumption) were at the EU average price. Larger consumers were 10% below the EU average (9% of consumption) but consumers using between 2,500 and 5,000 kWh per annum were 8% above the average (30% of consumption). Yes quite a number of householders are paying more than the EU average but the majority are not.

Since Eurostat changed the methodology for collecting these prices there is now a robust methodology that gives representative and comparative prices across all member states. Perhaps you could also take some time to study the methodology before you dismiss it.

Finally, you introduced a red herring on the updating of parameters/indices for PPP (not PPS). I never mentioned PPP, the figures quoted above are based on straight euro comparisons.

BTW, I am not representing anyone of standing or other wise. I have an interest in energy pricing and I’m curious as to why statements are being made, not just here, which are at variance with what I’m finding in the data.

Still waiting for that definition of “way over the top” and no ad hominen attacks this time.

I apologise for confusing you with those who, while ignoring any objective evidence on the Irish situation, extract data selectively from the Eurostat energy price data base to show that everything in the garden in Ireland is rosy.

Since you seem, as a householder and a businessman, to have such an interest in EU comparative energy price statistics I expect you are aware that, among other things, the variations in prices across countries and consumption sector reflect variations in sectoral inefficiencies, in the internal policies on cost allocation amog consumption sectors and in taxation policy.

The tax wedge in Ireland tends to be at the low end and this, of course, improves Ireland’s relative position. The Minister has directed that tariffs be re-balanced to reduce prices to larger volume consumers signifciantly. And this, of course has benefitted them, but, since the same total revenue must be recovered, all other consumers are, by definition, worse off. (The Minister’s direction is problematic as it undermines the CER’s independence to set prices and tariffs independent of political influence. Previously, the CER made its determination on the allocation of costs among consumption sectors; it has now been required to over-turn this determination at the directioon of the Minister.)

And as I have pointed out previously the existence of deadweight costs and inefficiencies is not unique to Ireland and variations in their incidence will be reflected in final prices. Only those who have an interest in ignoring it fail to accept the evidence that the approach to financing network investment and the determination to establish what looks like a competitive market in a market of insufficient size impose significant deadweight costs on Irish consumers. And this headlong dash for windpower will add even more.

However, since you seem determined to focus on comparative international price data, rather than look at what is under your nose, I don’t expect I’ll be able to convince you.

Btw, since you seem so well informed on energy matters, any thoughts on the main topic of this thread?

Thanks for the SEAI link. You’re right. I shouldn’t allow this kind of sniping to get under my skin. I suppose it’s because all the evidence I’ve presented over the years showing that electricity and gas prices are much higher than they need be – irrespective of prices in other countries – has been simply dismissed by the usual plethora of government agencies and bodies, that I’m being a bit cranky.

Interestingly though, Table 2 (in the SEAI report) shows the basic price of electricity in Ireland for the selected industrial consumers as the third highest among those listed and Table 4 shows it as the second highest for selected resodential consumers. It is also interesting that the basic gas price for the selected industrial consumers in Table 3 is lowest in the UK. This is likely to be quite close to the wholesale price in the UK NBP which broadly sets the price for bulk gas in Ireland and, during this period was much lower than the oil-linked price for gas imports on the continent. Not only is the Irish price almost €2/GJ above the UK price, but, given the high share of gas-fired generation, one would expect this lower inpt cost to be reflected in a more pronounced manner in Irish electricity prices.

In any event, the amount of time and resource available to those who wish to conceal or gloss over the reality is so much greater than I can muster, I expect I’m wasting my time. But I am looking forward to the publication of the report by the Review Group on State Assets and Liabilities as I would be surprised if it were not to contain some useful analysis of the performance of the ESB and BGE.